Insurers will no longer be able to claim input tax credit (ITC) on their administrative, operational, and distribution expenses. The extent to which this cost will be absorbed or passed on depends on each insurer’s margins and business mix.
Many policyholders are weighing their options. Should they defer premium payments until 22 September to take advantage of the GST benefit? Will those who have already paid multi-year premiums be eligible for a refund?
Mint decodes the implications from a policyholder’s perspective.
Should you delay your premium payments?
Policyholders who have paid premiums for two, three, or five years in one go are unlikely to receive the GST benefit retrospectively. However, industry executives say the final decision will depend on the government issuing its notification.
“For multi-year policies, the premium gets charged upfront along with GST. The law requires insurers to deposit GST at the rate applicable on the date of premium receipt,” says Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance.
“Since a ‘nil’ rate was not applicable back then, retrospective benefit does not apply. That said, we will follow the official notification closely, and any mandated benefit will be duly passed on to policyholders.”
For those whose policy renewals are due before 22 September, waiting to pay the premium later to claim the benefit will not work either. GST relief applies only if the renewal date itself falls on or after September 22. “Even if you use the grace period to delay payment beyond the date, the policy issuance date in the document will remain the same as the original renewal date, thereby attracting GST,” said CA Vinayak Bhat.
Some customers have also considered cancelling their policy during the free-look period and repurchasing it after 22 September to save on tax. While a practical move, experts caution against this strategy.
“Do this at your own risk. Any new condition or illness during the gap could affect your chances of getting the same cover later. This is especially risky in case of parents’ policies or those covering individuals with existing conditions,” said Mahavir Chopra, co-founder, Beshak.org.
Impact on life insurance products
Different life insurance products attract varying GST rates. Pure protection or term plans are taxed at 18%. Industry experts believe the exemption will make term insurance more affordable and boost its penetration.
Traditional savings-linked plans, where policyholders receive maturity benefits or periodic cashbacks, currently attract GST at 4.5% in the first year and 2.25% from the second year onwards.
“In existing savings-linked products, the loss of ITC will hit the surplus, since insurers cannot increase the base premium. This will likely push bonus rates down by 1–2%, causing existing IRR of 6% to slip around to 5.6%,” said veteran insurance expert Nilesh Sathe. “The impact will be sharper for policyholders early in the policy cycle, while those just four to five years away from maturity won’t see much change. For new policies, if premiums are revised upward to offset ITC loss, the reduction in IRR could be about 20 basis points.”
For unit-linked insurance plans (ULIPs), GST is technically 18%, but it is levied only on specific components such as mortality, fund management, premium allocation and admin charges, not the entire premium. Hence, the impact on IRR is expected to be limited. The same holds for single-premium life policies, where GST is charged at 1.8%.
Impact on health insurance products
Health insurance products attract a GST of 18%. With insurers frequently revising premiums due to medical inflation, the GST exemption will give major relief to policyholders, especially senior citizens. Meanwhile, hospitals have also received some GST relief in the form of reduced GST rates on medicines and medical equipment.
“This will improve our claim ratios as we’ll get better deals from hospitals if they pass on their GST relief to patients,” said Ankur Kharbanda, executive director & chief business officer at Niva Bupa Health Insurance. Singhel of Bajaj agrees and says the claim costs will come down, further easing the impact for customers.
Expect innovation in OPD insurance where 18% GST kept the premium-coverage ratio quite expensive. “As a result, most people continue to pay for doctor consultations, diagnostics, and medicines out of pocket. A GST exemption would allow insurers to offer OPD products at more attractive price points, encouraging broader adoption. This, in turn, would foster preventive care and early diagnosis, helping reduce the long-term cost burden on India’s healthcare system,” says Antony Jacob, former CEO Apollo 24/7. He has also headed a health insurance and non-life company in the past.
“This opens up a big opportunity for us to provide end-to-end solutions more cost-effectively with GST out of the picture. Currently, only 3–4% of people opt for OPD coverage. With costs coming down, I expect this number to rise to nearly 30%,” said Kharbanda.
The fuss about ITC
The idea to exempt retail life and health insurance products from GST is to lower prices and encourage greater adoption. However, due to the loss of input tax credit (ITC), the benefit to the policyholder may not be proportional to the exemption. ITC allows insurers to offset the GST paid on operational, claims, and distribution services against the GST collected from policyholders. With GST on retail health and life insurance now nil, insurers lose this offset, which increases their expenses.
In health insurance, the impact could be material. “The ITC hit will be around 3–8% of costs, depending on the volume of retail health business each company does,” said Singhel of Bajaj Allianz. It means if insurers pass on the cost to policyholders, the premium relief could still be to the tune of 12-15% if not the entire 18%.
Kharbanda expects the loss of ITC to be offset by fresh volume growth in retail plans—missing over the past two to three years—and a likely reduction in claim ratios, with hospitals themselves benefiting from GST relief. “We will get clarity in a month as we assess the impact, but it shouldn’t be much,” he said.
Life insurers are more cautious. “In the short run, margins may take a hit as we will not get ITC on a substantial portion of expenses. From a policyholder’s perspective, the benefit may be reduced to that extent. This reduction will be limited in ULIPs, where expenses are lower due to lower commissions. However, over time, customers stand to gain as this reform should expand the market, drive innovation and improve accessibility,” said Rushabh Gandhi, MD & CEO, IndiaFirst Life Insurance.
It is worth noting that GST has been made nil only for retail policies. Group insurance continues to attract tax. CA Ashish Karundia points out another nuance: “Policies sold to NRIs qualify as exports, which are zero-rated, so they would still get the policies without any ITC loss to insurers as the latter can claim a refund of ITC on exports.”
The government has emphasised that insurers must pass on the benefit to consumers. But analysts warn that if restrictions are too tight, companies may simply re-price and re-launch products at higher rates.
For now, policyholders will have to wait and watch how insurers recalibrate their strategies.
